BAITARANI GRAMYA BANK,BHUBANESWAR vs. ACIT, BALASORE

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA Nos.318 & 319/CTK/2013 Assessment Years : 2008-09 & 2009-2010

Baitarani Gramya Bank, Vs. ACIT, Balasore Circle, (succeeded by Odisha Balasore, Gramya Bank), 190/702, Kokila Residency, Ananta Bihar, Airport Area, Pokhariput, Bhubaneswar. PAN/GIR No.AAAJB 0149 B (Appellant) .. ( Respondent)

Assessee by : Shri B.K.Mohapatra, AR Revenue by : Shri D.K.Pradhan, DR

Date of Hearing : 17/08/ 2017 Date of Pronouncement : 24 /08/ 2017

O R D E R Per N.S.Saini, AM These are appeals filed by the assessee against the orders dated

27.3.2012 and 15.2.2013 of the CIT(A)- Cuttack for the assessment years

2008-09 & 2009-2010, respectively.

First, we take up the appeal in ITA No.318/CTK/2013 for A.Y. 2008-09.

days. The assessee has filed an affidavit duly notorised for condonation

of delay in filing the appeal. After going through the condonation petition,

we find that the assessee had reasonable cause for not filing the appeal

within the stipulated time. Ld D.R. did not have any serious objection for

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condoning the delay. We, therefore, condone the delay of 127 days in

filing the appeal before the Tribunal and admit the appeal for hearing.

adjudication by us.

hence, same is dismissed as not pressed.

the CIT(A) erred in confirming the addition of Rs.16,50,000/- under the

head “provision for standard assets” as per RBI norms.

the assessee to explain why provision for standard assets amounting to

Rs.16,50,000/- shall not be disallowed since provisions for expenditure

claimed in the profit and loss account are not permissible expenditure

under the Act. The assessee explained that the bank provided for an

amount of Rs.16,50,000/- towards provisions for standard assets in

accordance with the guidelines issued by Reserve Bank of India for

provisioning of loans and advances of a Bank. The assessing Officer was

not satisfied with the explanation of the assessee and observed that such

provision for standard assets is not permissible expenditure under the act

and moreover expenditure on such assets is in the nature of capital

expenditure. Therefore, he disallowed Rs.16,50,000/- and added to the

income of the assessee.

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the norms of RBI, all assets of the bank, whether they are standard

assets or doubtful assets, a provision is being made towards bad debt. To

allow such a provision in the accounts, the I.T.Act has allowed deduction

u/s.36(1)(viia) for such provision towards bad & doubtful debts. The

deduction was allowed to banks as per Rule 6ABA. The assessee being a

Regional Rural Bank and all its branches are located in rural areas and

banking is provided to rural mass of the district, the deduction

u/s.36(1)(viia) as per Rule 6ABA is eligible to the assessee bank. It was

submitted that the assessee claimed a total provision of Rs.1,68,13,000/-,

therefore, the total provision for all assets including standard assets is

within the overall limit for which the assessee is eligible to claim

deduction u/s.36(1)(viia) of the Act. Hence, it was submitted that the

disallowance of the provision for standard assets of Rs.16,50,000/- is not

sustainable.

relying on the decision of Hon’ble Supreme Court in the case of Indian

Molasses Co. Ltd vs CIT (1959) 37 ITR 66 (SC), wherein, it has been held

that provision for a contingent or unaccrued liability is not allowable as

deduction, confirmed the disallowance of Rs.16,50,000/- made by the

Assessing Officer.

authorities.

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Supreme Court in the case of Vijay Bank vs CIT (2010) 323 ITR 166 (SC),

wherein, it was held that after April 1, 1989, a mere provision for bad

debt will not be entitled to deduction u/s.36(1)(vii). If an assessee debits

an amount of doubtful debt to the profit and loss account and credit the

assets account like sundry debtors account, that would constitute a write

off of an actual debt. However, if an assessee debits provision for

doubtful debt to the profit & loss account and makes a corresponding

credit to the current liabilities and provisions on the liabilities side of the

balance sheet, then it would constitute a provision for doubtful debt. In

the latter case, the assessee would not be entitled to deduction after

April, 1989. He further relied on the decision of Hon’ble Supreme Court in

the case of Southern Technologies vs JCIT, 320 ITR 577 (SC), wherein

also, similar finding was given. Hence, it was his submission that the

order of the CIT should be confirmed.

authorities and materials available on record. In the instant case, the

undisputed facts are that the assessee made a claim for deduction of

Rs.1,68,13,000/- for bad and doubtful debts which includes

Rs.16,50,000/- as provision made for standard assets in the profit and

loss account. The Assessing Officer disallowed deduction of

Rs.16,50,000/- on the ground that it was not permissible expenditure and

that it was capital expenditure.

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11.1 On appeal, the CIT(A) confirmed the action of the Assessing Officer

on the ground that it is a contingent liability.

deduction claimed of Rs.1,68,13,000/- which includes Rs.16,50,000/- was

in accordance with the provisions of section 36(1)(viia) of the Act. The

contention of the assessee was that it being a Regional Rural Bank,

provision of section 36(1)(viia) of the Act was applicable to it and the

provision of Rs.1,68,13,000/- being within the limit prescribed

u/s.36(1)(viia) of the Act, the same was fully allowable. We find that the

CIT(A) has confirmed the action of the Assessing Officer without dealing

with the above submission of the assessee. The above action of the

CIT(A) is clearly erroneous and unsustainable. We find that no material

has been brought before us by ld D.R. to show that why deduction

u/s.36(1)(viia) of the Act is not admissible to the assessee in respect of

entire amount of Rs.1,68,13,000/-, which has been debited by the

assessee in its profit and loss account as provisions for bad and doubtful

debts. Section 36(1)(viia) of the Act reads as under:

36(1) – The deductions provided for in the following clause shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 – …. (viia) – in respect of any provision for bad and doubtful debts made by – (a) a scheduled bank[not being [ ] a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank [or a co-operative bank other than a primary agricultural

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credit society or a primary co-operative agricultural and rural development bank] an amount [not exceeding seven and one- half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding (ten) per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.

which qualifies for deduction under this section is allowable subject to the

amount mentioned in the above section. No material has been brought

before us to show that the assessee is not a person who is entitled for

deduction as per the provision of section 36(1)(viia) of the Act. Further

no material has also been brought before us to show that the provision of

Rs.1,68,13,000/- made by the assessee exceeds the qualifying amount

mentioned in the said section. We, therefore, delete the disallowance of

Rs.16,50,000/- and allow this ground of appeal of the assessee.

the CIT(A) erred in confirming the disallowance of deduction of

Rs.32,13,587/- under the head leave encashment u/s.43B(f) of the Act.

assessee to explain why provision towards leave encashment of

Rs.37,00,000/- should not be disallowed since provision for expenditure

claimed in the profit and loss account are not permissible expenditure

under the Act. The assessee submitted before the Assessing Officer that

provision for leave encashment for Rs.37,00,000/- was made in the

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accounts. However, the bank has paid an amount of Rs.4,86,413/-

against leave encashment made during earlier years and not allowed to

them as deduction. The Assessing Officer observed that auditor in his

report in Schedule-18 at item Sl.No.6(j) mentioned that leave

encashment is accounted for on cash basis. Therefore, he did not accept

the contention of the assessee regarding payment of Rs.4,86,413/-. The

Assessing Officer concluded that provision towards leave encashment of

Rs.37,00,000/- is not permissible under the Act.

made is disallowed u/s 43B(f) of the Act, the Hon’ble Calcutta High Court

in the case of Exide Industries Ltd vs UOI, 292 ITR 470 (SC) has held that

liability towards leave encashment should be allowed as a deduction even

if the same is not paid. He submitted that the Assessing Officer has

denied deduction towards the actual payment of leave encashment to the

employees of Rs.4,86,413/-.

that as per Schedule-5 to the balance sheet under item (h), the assessee

has made actual payment of leave encashment of Rs.4,86,413/- during

the year. He, therefore, directed the Assessing Officer to allow payment

of Rs.4,86,413/- and disallowed balance amount of Rs.32,13,587/-.

the case of Exide Industries Ltd., (supra) has held as under:

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…”The original section was incorporated to plug in deductions claimed by not discharging statutory liabilities. Provision was subsequently made to restrict deductions on account of unpaid loan to the financial institutions. Leave encashment is neither statutory liability nor a contingent liability. It was a provision to be made for the entitlement of an employee achieved in a particular financial year. An employee earns certain amount by not taking leave which he or she is otherwise entitled to in that particular year. Hence, the employer is obliged to make appropriate provision for the said amount. Once the employee retires he or she has to be paid such sum on cumulative basis which the employee earns throughout his or her service career unless he or she avails of the leave earned by him or her. That could not have any nexus with the original enactment. An employer is entitled to deduction for the expenditure he incurs for running his business which includes payment of salary and other perquisites to his employees. Hence, it is a trading liability. As such he is otherwise entitled to have deduction of such amount by showing the same as a provisional expenditure in his accounts. The legislature by way of amendment restricts such deduction in case of leave encashment unless it is actually paid in that particular financial year. The legislature is free to do so after they disclose reasons for that and such reasons are not inconsistent with the main object of the enactment. No reasons have been provided. Such enactment is also not consistent with the original provision being s. 43B which was originally inserted to plug in evasion of statutory liability. It does not imply that the legislature was not entitled to bring such amendment. They were within their power to bring such amendment. However, they must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the apex Court decision. Therefore, s. 43B(f) is struck down being arbitrary, unconscionable and de hors the apex Court decision in the case of Bharat Earth Movers (2000) 162 CTR (SC) 325.” 19 The A.R. has contended that even though the decision of the

Hon'ble Calcutta High Court holding Clause (f) of Section 43D as ultra

virus is stayed by the Hon'ble Supreme Court while admitting the SLP

filed by the Revenue, the same has not been reversed and, therefore, the

Tribunal is bound to follow the same being a binding precedent. He,

therefore, prayed that the matter should be restored back to the file of

the Assessing Officer for adjudication afresh of the issue in the light of the

decision of Hon’ble Supreme Court in the case of Exide Industries ltd

(supra).

19.1 The DR also agreed with the submission of ld AR of the assessee.

In the circumstances of the case, we set aside the order of the CIT(A) and

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remit the matter to the file of the Assessing Officer to re-adjudicate the

issue in the light of the Hon’ble Supreme Court decision. Hence, this

ground is allowed for statistical purposes.

allowed for statistical purposes.

Now we take up the appeal for the assessment year 2009-10 in ITA No.319/CTK/13 21. Ground No.1 is general in nature and hence, requires no separate

adjudication.

same is dismissed as not pressed.

the CIT(A) erred in confirming the action of the Assessing Officer in

disallowing Rs.,39,42,283/- being amounts written off/amortization of

Government securities.

are that the assessee filed a copy of audited financial statement for the

financial year 2008-09. From a perusal of the same, he observed that the

assessee has claimed Rs.1,39,42,283/- as additional provision due to

write off of advances/amortization of government securities as

expenditure in the profit and loss account for the financial year 2008-09.

The same forms a part of liabilities of the balance sheet as on 31.3.2009.

The CIT(A) observed that section 36(1)(vii) of the Act dealing with

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allowance of bad debts written off by the assessee covers banking as well

as non-banking assessees. He observed that the Hon’ble Supreme Court

in the case of Vijaya Bank vs CIT (2010) 323 ITR 166 (SC) held as under:

“After April 1, 1989, a mere provision for bad debt will not be “entitled to deduction u/s.36(1)(vii). If an assessee debits an amount of doubtful debt to the profit and loss account and credit the assets account like sundry debtors account, that would constitute a write off of an actual debt. However, if an assessee debits provision for doubtful debt to the profit & loss account and makes a corresponding credit to the current liabilities and provisions on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April, 1989.” 25. Therefore, following the decision of Hon’ble Supreme Court in the

case of Vijaya Bank (supra), he confirmed the disallowance of

Rs.1,39,42,283/- made by the Assessing Officer.

the CIT(A) erred in confirming the disallowance made under provision for

non-SLR securities as per Mark to market valuation of Rs.2,50,125/-.

Rs.2,50,125/- being provision for non-SLR securities as per Mark to

market valuation.

assessee relied on the decision of Hon’ble Karnataka High Court in the

case of Karnataka Bank Ltd vs ACIT, (2013) 356 ITR 549 (Kar) and

submitted that the Hon’ble High Court has held as under:

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“The assessee had maintained the accounts in terms of the Reserve Bank of India Regulation and it had shown the securities as investments. But consistently for more than two decades they had been shown as stock-in-trade and depreciation was claimed and allowed. The value of the stocks being closely connected with the stock market at the end of the financial year while valuing the assets, necessarily the assessee had to take into consideration the market value of the shares. If the market value was less than the cost price, in law, they were entitled to deductions and it could not be denied by the authorities under the pretext that they were shown as investment in the balance sheet. 30. He further relied on the decision of Hon’ble Supreme Court in the

case of United Commercial Bank vs CIT, 240 ITR 355 (SC), wherein, it

has been held as under:

” Where the assessee-bank had been valuing its stock-in-trade (investments) "at cost" in the balance sheet but it had been valuing the same investments "at cost or market value, whichever is lower", for income-tax purposes for over 30 years, the same could not be discarded by the Revenue on the ground that assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. For valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation.”

the facts of above cases of Hon’ble Karnataka High Court in the case of

Karnataka Bank Ltd., (supra) and Hon’ble Supreme Courts in the case of

United Commercial Bank (supra). The assessee is also following

consistently the method of amortization of loss on the basis of market

value of securities as at end of the financial year and valuing the

government securities on the basis of cost or market price whichever if

lower and the same has been allowed as deduction to the assessee.

Therefore, the addition should be deleted.

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assessee.

authorities and materials available on record. In the instant case the

undisputed facts are that during the year the assessee has claimed

deduction of Rs.1,39,42,283/- on amortization of loss of government

securities as at the end of the financial year as the market value of the

securities was lower than the cost price of the securities to the assessee.

Similarly, the Assessing Officer also disallowed provision for non-SLR

securities as per Mark to market valuation of Rs.2,50,125/-. The

contention of the assessee has been claiming this loss consistently for

past so many year and was allowed deduction for the same. Instruction

No.17/2008 dated 26.11.2008 issued by the CBDT wherein, at para vi, it

has been clearly stated that in the case of HFT and AFS Securities of the

Bank, the depreciation and appreciation to be aggregated script wise and

only depreciation, if any, is required to be provided in the accounts.

lower authorities for disallowing loss arose on the year end revaluation of

securities. Our view is supported by decision of Hon'ble Bombay High

Court in the case of CIT Vs. HDFC Bank Ltd., passed in ITA N0.330 of

2012; United Commercial Bank Vs. CIT, 240 ITR 355(SC); Investment

Ltd. Vs. CIT, 77 ITR 533 (SC); and CIT Vs. Bank of Baroda, 262 ITR 334

(Bom). Respectfully following the decision of Hon'ble Supreme Court and

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Hon'ble Bombay High Court and considering the classification of security

so made and the loss arose on account of revaluation of securities are

required to be allowed. Ld D.R. has not controverted the submission of

the assessee or cited any contrary decision. Facts being identical,

therefore, respectfully following the decisions of Hon’ble Karnataka High

Court in the case of Karnataka Bank Ltd. (supra) and Hon’ble Supreme

Court in the case of United Commercial Bank Ltd (supra) we set aside the

orders of lower authorities and delete the addition of Rs.1,29,42,283/-

and Rs.2,50,125/- and allow both the grounds of appeal of the assessee.

Order pronounced in the open court on 24 /08/2017. Sd/- sd/- (Pavan Kumar Gadale) (N.S Saini) JUDICIALMEMBER ACCOUNTANT MEMBER Cuttack; Dated 24/08/2017 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant : Baitarani Gramya Bank, (succeeded by Odisha Gramya Bank), 190/702, Kokila Residency, Ananta Bihar, Airport Area, Pokhariput, Bhubaneswar 2. The Respondent. ACIT, Balasore Circle, Balasore 3. The CIT(A)- Cuttack 4. Pr.CIT- Cuttack 5. DR, ITAT, Cuttack 6. Guard file. //True Copy// BY ORDER,

SR.PRIVATE SECRETARY ITAT, Cuttack